NY futures ended the week slightly higher, as December gained 88 points to close at 68.19 cents.

Just when it looked like the market was finally going to succumb to bearish pressures last week, another Texas weather scare and the promise of additional price support in Gujarat spiked the December contract to a six-week high on Monday. However, the way things look today it was just another flash-in-the-pan, since the market has already given back most of its gains.

When we look at the market from a longer-term perspective, we notice that December has spent the last 4-1/2 months, or most of the growing season, in a relatively tight range between 66.15 and 71.20. The exception were seven trading days in early September, when the market quickly moved up to 75 cents and back in reaction to Hurricane Harvey. But by and large December has been meandering in a 500-point range since the middle of June.

In doing so December has shown relative strength, because crop estimates have turned decisively more bearish since the June report. The US crop estimate is now 1.92 million bales larger than in June, while global production is 6.13 million bales bigger. Global mill use is also up, but only by 1.50 million bales, which means that both global stocks (+4.67 million bales) and ROW stocks (+4.85 million bales) are now significantly higher than four months ago.

So why is December still trading 200 points above the June low? When we look at the spec/hedge report by the CFTC, we notice that since the middle of June the specs have reduced their net long by about 2.3 million bales, whereas the trade cut its net short by the same amount, going from about 14.1 million bales net short to 11.8 million bales last week. It makes sense that specs would get out of longs, but why would the trade reduce its net short position in the futures market in the face of such a bearish WASDE balance sheet, at prices higher than those prevailing in June?

The answer has probably to do with the cash market. US export sales alone have totaled 7.0 million statistical bales since the middle of June, and there have been sizeable commitments in other growths as well. In other words merchants may have increased their short book in the cash market instead of New York and have been in no hurry to cover more than needed since they are anticipating lower prices. Growers are probably under-hedged at this point in time since they didn’t want to sell too many futures with crops still in the field.

Up to now it may have made some sense that the trade net short position would only be at 11.8 million bales, which is 4.0 million bales less than at the same time last season. But once the crops have moved in, the pile of unsold cotton will rapidly increase and this requires additional short hedges, especially when we consider the massive amount of unfixed on-call cotton, with 13.72 million in sales and 3.67 million bales in purchases still open. Typically merchants sell futures in order to lock in their on-call sales to mills and then buy them back once the mill issues fixation orders.

Therefore, with merchants and growers expected to be a net sellers of futures over the coming months and with specs likely to exit more longs, the market should see selling pressure going forward. Mills are the only major buyer at this point, but will do so on a scale down basis only.

Earlier this week the state government of Gujarat has announced a bonus payment above the MSP (Minimum Support Price) to farmers, which should lift the threshold for Indian exports to around 75 cents landed Far East. This means that the US and other origins will be able to undercut India without having to engage in a price war.

US export sales were once again quite strong this week at a combined 352,100 running bales to 19 different markets. Total sales for the season are now at 8.7 million statistical bales, of which only 1.8 million bales have so far been shipped. Sales are around 2.3 million bales ahead of last season, but shipments lag 0.35 million bales behind due to the slow arrival of the crop.

So where do we go from here? The increase of Gujarat’s MSP combined with some potential freeze losses in West Texas this weekend won’t add up to a bullish market, but they may make it a little less bearish. In other words, we may deal with a slightly higher trading range going forward, with March possibly holding near the mid-60s instead of the low-60s. The upside looks limited until we have cleared the extra inventory, which will only start to happen once China enters the scene as a stronger importer.

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